The government is seeking input on its proposed 12.5% tax credit for new research and development (R&D), to take effect from 1 April 2019.
Submissions are due by 1 June 2018.
We summarise below key aspects of the proposal.
The proposed tax incentive is a 12.5% tax credit on "eligible expenditure" available to businesses carrying out "R&D activities" in New Zealand. Commensurate imputation credits will also be available for companies receiving the R&D tax credit (to ensure shareholders benefit from the tax credit when dividends are paid).
The credit will be capped at $15 million a year, with a possible Ministerial waiver or pre-registration system for large claims. To qualify for the tax credit, "eligible" R&D expenditure must have exceeded $100,000 that tax year.
To be eligible, businesses must:
- be located, and have conducted the R&D, in New Zealand (with an allowance of up to 10% of eligible expenditure incurred overseas if relevant conditions are met)
- satisfy the test of carrying on business and claim R&D expenditure relating to that business, and
- control, bear the financial risk, and own the results of the R&D.
The discussion document proposes that government entities (including State Owned Enterprises) may be excluded from eligibility.
What qualifies as R&D activity?
R&D activity does not need to be successful to be eligible for the tax incentive.
Coverage would be available to:
- Core activities: those conducted using scientific methods that are performed for the purposes of acquiring new knowledge or creating new or improved materials, products, devices, processes, or services; and that are intended to advance science or technology through the resolution of scientific or technological uncertainty, and
- Support activities: those that are wholly or mainly for the purpose of, required for, and integral to, the performing of the activities referred to in paragraph (a).
Excluded would be R&D in relation to:
- prospecting, exploring or drilling for minerals, petroleum, natural gas or geothermal reserves
- market research, market testing, market development or sales promotion (including consumer surveys)
- the making of cosmetic or stylistic changes to materials, products, devices, processes or services
- commercial, legal and administrative aspects of patenting, licensing or other activities
- the reproduction of a commercial product or process by a physical examination of an existing system or from plans, blueprints, detailed specifications or publicly available information
- pre-production activities, such as demonstration of commercial viability, tooling-up and trial runs, and
- dual purpose activities (being activities that have both an R&D purpose and a non-R&D purpose). This exclusion is intended to prevent "business as usual" expenses being included in R&D claims.
What is "eligible expenditure?"
As an initial requirement, expenditure must be deductible (or amortisable) under the Income Tax Act (or would be but for the business being tax exempt).
Two methods are proposed for determining eligibility:
- solely on direct R&D labour costs (in which case the rate of the tax credit would be increased to reflect the smaller expenditure), or
- a list of items of expenditure with exclusions, broadly similar to the 2008 R&D scheme.
Option One is significantly more straightforward to administer but narrows the application of the tax incentive and favours labour intensive R&D. Option Two will lead to threshold issues and carries a risk that taxpayers will inflate their claims by reclassifying normal expenditure.
The discussion paper acknowledges the increasing importance of software R&D to the New Zealand economy. Officials are carrying out further work to ensure that the R&D definition adequately captures software R&D activity.
Businesses with tax losses
The discussion document acknowledges that further policy work is required to support R&D intensive firms in their early years. Current proposals are that the tax incentive will be non-refundable but that unused credits can be carried forward to future years.
How does this differ from the repealed R&D scheme?
At first blush, the proposed tax incentive resembles the short-lived 2008 R&D tax credit but there are some significant points of difference, designed to prevent abuse. These include:
- the exclusion of dual purpose activities
- the non-refundable nature of the tax credit
- possible promoter penalty rules for tax advisers receiving contingent fees on a successful inflated claim, and
- provisions to ensure that the tax incentive is only available to the entity that bears the financial risk of the R&D activity.
What about the existing R&D tax losses scheme?
The existing "cash out" scheme is to be reviewed later and will be administered separately in the interim.
As noted above, submissions close on 1 June 2018. It is intended that there will be further public consultation in the second half of 2018.
The government expects that legislation will be enacted in early 2019 with the tax incentive to take effect from 1 April 2019.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.